Editorial: The pension delimma

Union-Tribune

San Diego’s enormously costly pension problem hangs over the city like a pall. Between past City Councils’ irresponsible decisions to underfund the pension while increasing benefits and the huge stock market downturn of recent years, the city’s system has a $2.1 billion shortfall and is only about two-thirds funded. This means the city budget faces a never-ending squeeze on services, compensation and more.

But what’s not widely appreciated is the additional challenges San Diego faces on the pension front because of the actions of the San Diego City Employees Retirement System (SDCERS). The city pension agency is supposed to perform an essentially technical role akin to a fiscal caretaker. Instead, it had sometimes seemed like a political body in its willingness to mount costly legal defenses of dubious past interpretations of pension laws.

This is reflected in SDCERS’ history of defending unconscionable decisions it made involving a program first adopted in 1993 and expanded in 1997 that allowed city employees to buy up to five years of service credit to increase their annual pensions upon retirement. The law guiding the program required that the purchase amount be equal to the anticipated full cost of providing the larger pension.

In July 2002, then-SDCERS Administrator Larry Grissom warned the SDCERS board that the cost charged employees for the purchase of service credits was too low and that the board had a fiduciary duty to “fix the bleeding” and make the program cost-neutral. An actuarial study was ordered and completed in August 2003. It recommended an 80 percent increase in the purchase service charge for general employees and a 42 percent increase for public safety employees.

But instead of immediately implementing this change, the SDCERS board gave all city employees a 60-day window to buy years of service under the existing rates. During that period, 2,021 employees bought 6,554 years of service credits – more than all the previous purchases combined since the program was expanded in 1997.

In August 2007, SDCERS’ actuary reported this decision had added $146 million to the unfunded actuarial liability of the pension system. But in November 2007, the SDCERS board effectively voted to make the city pick up the tab for the liability – ignoring its responsibility to operate the service-purchase program in cost-neutral fashion.

This led to a successful legal challenge from the city. On June 7, the Fourth District Court of Appeal gave San Diego City Attorney Jan Goldsmith his latest victory in legal battles with SDCERS, dismissing the pension agency’s legal arguments and saying the agency did not have the “authority to evade the law.”

The immediate result of this ruling is that Mayor Jerry Sanders’ administration is preparing to pay at least $2.6 million less to SDCERS than the $229.1 million SDCERS says the city owes on July 1, because Sanders and Goldsmith believe that $2.6 million or more of the ARC bill is for illegally conferred benefits.

The most needed fallout from this decision, however, is an attitude change on the part of the people running SDCERS. A recent concession to Goldsmith over the funding of disability retirement costs suggests such a change may be happening. A decision not to appeal the June 7 appellate decision would be another welcome sign.

The elephant in the room is Goldsmith’s challenge to SDCERS’ interpretation of unique language in the City Charter that holds that employees and the city have a “substantially equal” responsibility for the actuarial soundness of the pension system. Goldsmith argues that means employees need to pick up half the cost of the recent losses in SDCERS’ reserves stemming from the stock market’s downturn. SDCERS says the responsibility is the city’s alone. But Goldsmith’s record in his court fights with SDCERS gives him considerable credibility.

That could mean that at some point, years down the road after SDCERS’ last appeal is lost, city employees could wake up one day to learn they are legally required to make at least $4,000 more each year in annual pension contributions.

Goldsmith notes that there is no reason for such a deeply adversarial – and wrenching – conclusion. He suggests that after SDCERS’ policies are finally brought into compliance with the letter of city law, it would be possible for public employee unions, City Council members and the mayor to have a comprehensive negotiation that ends up with changes that union members can live with but that are more equitable to city taxpayers.

Sanders says he’s open to that possibility and believes that new employees actually would welcome having a range of pension options that would allow them to pay much less now for a less generous benefit in retirement.

But the mayor also entertains more drastic ideas, such as scrapping defined-benefit pensions entirely for new city hires in favor of 401(k)-style plans such as those offered in the private sector. Sanders even thinks the City Council might be open to implementing such a big change, noting its willingness to end city-funded defined retirement health benefits for new hires.

We have our doubts. But if the alternative is a city in fiscal ruin, then maybe public employee union members whose benefits are already vested and their Democratic allies on the council might be persuadable.

And if they’re not, there is always the option of signature gathering for a ballot initiative. Proponents of a switch to a 401(k)-style system would have an awful lot of ammunition beyond the predictable arguments about the unsustainable costs of defined-benefit programs. They could also point to SDCERS’ record of bad faith, starting with its 2003 and 2007 decisions to ignore plainly written law in favor of a scheme that punishes city taxpayers.

This is the road that San Diegans may already be on whether or not the San Diego City Employees Retirement System atones for its mistakes. But that absolutely doesn’t mean SDCERS should dig its heels in. Instead, the agency has a legal and fiduciary obligation to stop being, in Goldsmith’s words, “a pension system that historically has not complied with our City Charter in many ways.”

As for the public, we acknowledge that these green-eyeshade debates over the city’s pension woes may be dry and difficult to follow. But it is crucial to San Diego’s future that we have such debates and that they be resolved responsibly. Here’s hoping this understanding guides the actions of all parties to the discussion – and creates a sense of urgency about fixing our pension problem.